Robert McDonald is the finance director at Burton-upon-Trent-based Punch Taverns. The company is one of the U.K.'s leading operators of leased and tenanted pubs, with a nationwide portfolio of over 4,500 pubs. Punch Taverns has two securitizations outstanding, Punch Taverns and Punch Funding II.
Punch Taverns is the first whole business securitization that also has a stock market listing. Do you see any conflicts of interest between the two?
No, I think actually it's something that works quite well together. The business becomes more visible and more clearly regulated, bringing good focus to the business, which helps the bondholders. From the equity inventors point-of-view, they know the debt is high quality. What we have found is that the equity market doesn't understand the debt market and there is some uncertainty about our level of gearing [leverage] and I need to help them understand that issue.
Prior to Punch Taverns' stock market listing last April there was some negative press about the company charging too much for beer. How do you respond to that?
I think everyone feels they pay too much for beer. It's a natural reaction. Traditionally, pubs were owned by brewers and they would charge low rent and make the margin on the beer. It's a model that's stood the test of time and it's an evolving model. We give a discount on the beer, but charge a more realistic rent. Increasingly we're giving more discounts on the beer and because our lease agreements with lessees are long-term agreements, we change them as the leases come up for renewal.
Punch Taverns has acquired 191 pubs since last August, will you continue to pursue an aggressive acquisition policy? What is your target for this year?
Yes, we will because we can make good returns on acquisitions. There are 60,000 pubs in the U.K. and we own about 4,500. We aim to spend £100 million on acquisitions this year to buy about 300 pubs. We're able to make returns above our cost of capital by adding value to the pubs, because we are able to apply our purchasing power to the pub as well as our financing ability.
Has Punch been negatively affected by the decline in beer sales?
To say there is a decline in beer sales is not quite right. People are trading up, drinking lager instead of ales, for example. Actually, there is not a decline in beer sales, but a decline in beer volume. People are paying more for better quality drinks, which is less volume. Less than half of our income comes from beer, most comes from rent which gives us part of the profits in the pub, which sells more coffee and food.
Analysts note that while an increase in drinks prices and rents has helped pub companies' bottom lines, going forward, this will be difficult to sustain and some pub deals will be negatively affected. What is Punch doing to respond to this potential problem?
I don't really agree with the analysts. There is overall organic growth in the profitably of pubs. Essentially, we have 4,500 individual businesses, which are very flexible and able to adapt. We get growth in rental income and growth in margins.
When do you anticipate re-financing Punch Funding II?
We do anticipate refinancing in 2005 because there is a step-up in the floating rate notes within Punch Funding II in 2005 and we will refinance those then.
Does Punch Taverns have any near-term financing needs?
Well, the way we finance the acquisitions is to use shorter-term or revolving facilities through Royal Bank of Scotland and Barclays Capital. We would anticipate within the next 12 months doing a tap issue into one of the securitizations groups. We like to get long-term refinancing of the acquisitions and securitization is a very good way of achieving that.
With the two securitization groups there is quite a bit of bureaucracy you have to follow with them. One of the things we would consider would be some way to combine the two, but that would be a large project.
What criteria does Punch Taverns use in selecting a lead underwriter for a securitization?
All the usual ones: scale, respect, a large and well-known institution. We look for expertise particularly in our market place, the ability to market the deal and negotiate with ratings agencies. The pub securitization market is quite large and there are some good players in that market who can underwrite and structure deals. We have used Schroder Salomon Smith Barney and RBS, which both have done a great job.